Executive summary

On 12 March 2025, the Danish minister of taxation published a draft bill for public hearing that proposes a tax on interest that nonresident companies pay to affiliated nonresident companies if the underlying controlled debt is allocable to real estate in Denmark. The same taxation would apply to capital gains realized on the controlled debt financing real estate in Denmark. The bill would also require the nonresident debtor company to collect a withholding tax.

The new rules would apply to income that is paid or accrues from 1 July 2025 onward. If Parliament adopts the proposal, the interest and capital gain taxation could significantly impact international investors in Danish real estate where investments are owned by nonresident entities either directly or through tax-transparent entities. This Alert discusses key aspects of the proposed new rules.

Current rules

Interest and capital gains on controlled debt

Nonresident companies are currently subject to Danish taxation on interest on controlled debt if the payor is a Danish company or the debt is allocable to a permanent establishment (PE) in Denmark. Interest on controlled debt that is allocable to a real estate in Denmark is not subject to Danish taxation if a PE does not exist, even though the corresponding interest expenses normally will be tax deductible from Danish income. Accordingly, if real estate in Denmark does not give rise to a PE, a nonresident creditor company is not subject to Danish taxation on interest on controlled debt allocable to the real estate. A PE will normally not arise if administration of the real estate is outsourced to an independent administration company. In this situation, a nonresident real estate investor will be subject to Danish taxation on net income from the real estate and on capital gains from the disposal of the real estate, but a PE will not exist. This tax treatment is also applicable to capital gains on loans granted to a nonresident company that owns real estate in Denmark.

Withholding tax obligation

A nonresident company with a PE in Denmark must apply a 22% withholding tax on interest and royalties paid to an affiliated nonresident company if (1) the underlying loan or intangible property is allocated to the PE and (2) the nonresident debtor has a legal forum in Denmark. If the debtor does not have a legal forum in Denmark, a withholding tax obligation does not exist. However, if payment is made by an authorized person with a legal forum in Denmark, the authorized person will be obligated to apply withholding tax.

Proposed tax rules

The draft bill would subject nonresident creditor companies to Danish taxation on interest and capital gains on controlled debt if the following condition were satisfied:

• A nonresident company is subject to Danish taxation on real estate in Denmark that it owns directly or indirectly through a Danish or foreign tax transparent entity such as a partnership. (The new rules would not apply if investments in Danish real estate are organized through a Danish limited liability company (A/S or ApS).)
• A nonresident company has granted a nonresident real estate owner a loan that is allocable to the Danish real estate (a loan would normally be allocable to the real estate if the loan proceeds were used to finance the acquisition, development or operation of the real estate).
• The creditor and debtor companies are affiliated.

Danish taxation would apply irrespective of whether the nonresident debtor company is entitled to claim a tax deduction for the corresponding interest expenses in Denmark.

Danish taxation of interest would not apply in the following situations:

• The nonresident creditor has a PE in Denmark and the controlled debt and interest is allocable to the PE.
• Danish taxation must be reduced under the European Union Interest and Royalty Directive.
• Danish taxation must be reduced under a tax treaty.
• A Danish parent company controls the nonresident creditor company.
• A nonresident parent company in a tax treaty country controls the nonresident creditor company and is subject to controlled-foreign-corporation taxation on the income of the nonresident creditor company.
• The nonresident creditor company is subject to tax at a rate of at least three quarters of the Danish corporate tax rate of 22% (i.e., 16.5%), and the income is not repaid to another company that is subject to tax at a rate below 16.5%.

Proposed withholding tax obligation

A nonresident debtor company with a PE or real estate in Denmark would be obligated to apply a 22% withholding tax in taxable payments (interest, capital gains and royalties) made to affiliated nonresident companies, irrespective of whether the nonresident debtor company has a legal forum in Denmark. If the payment is made by an authorized person with a legal forum in Denmark, this person would be directly and jointly liable for the withholding tax.

Implications

Nonresident companies with investments in Danish real estate that are owned directly or through a Danish or non-Danish tax transparent partnership should immediately review the tax consequences of the proposed rules, which would be applicable to income paid or accrued from 1 July 2025.